e-commerce in Bermuda, the UK has set out its views on the tax status of web sites and servers.

Speaking at a conference in Lisbon, the director of the Inland Revenue's international division, Gaby Makhlouf, outlined the British Government's position, which mirrors that expounded by the Organisation for Economic Co-operation & Development (OECD) earlier this year.

Mr. Mahklouf -- who, by coincidence, sits on the committee that has been reviewing "harmful tax jurisdictions'' for the OECD -- said: "In the UK, we take the view that a web site of itself is not a permanent establishment. And we take the view that a server is insufficient of itself to constitute a permanent establishment of a business that is conducting e-commerce through a web site on the server. We take that view regardless of whether the server is owned, rented or otherwise at the disposal of the business.'' This means that the activities of British companies which merely locate their web site or server in Bermuda may not qualify as Bermuda-based operations for UK tax purposes. This position will not surprise Bermuda service companies, who have assumed that such would be the case.

The definition of what constitutes a permanent establishment has yet to be agreed worldwide; indeed, the British and the OECD are ahead of others in defining the term.

Under the OECD's model tax treaty, a non-resident business is only taxable in a foreign country to the extent that it is carrying on business there through a permanent establishment. A permanent establishment is defined as being "a fixed place of business through which the business of an enterprise is wholly or partly carried on''.

Peter Nias, a partner in the London office of lawyers McDermott, Will & Emery, wrote in a firm's internal memo which he shared with The Royal Gazette : "This clarification is to be welcomed and is a positive initiative on the part of the Inland Revenue and the UK government.'' He continued: "It has been made to enable businesses to know where they stand in order to make investment decisions and calculate their tax liabilities. I believe this will make the UK even more favourable as a jurisdiction through which to carry on e-business.'' In his speech, Mr. Mahklouf said: "The OECD has been reviewing with the business community the long term future of the `permanent establishment' concept -- the threshold in the OECD's model tax treaty below which a country will not tax non-residents carrying on a business in that country. This is crucial work. And it is important that it is carried out with due consideration, and in partnership between representatives of Government and business.'' He continued: "(The notion of a) `permanent establishment' is a long-standing concept. It is tried and tested. And it is widely supported. As yet, we do not know enough about how e-commerce will develop for anyone to make reasoned decisions on whether or not to move away from it. But now is clearly the time for the debate to begin. "In the meantime, early decisions are needed on the status of web sites and servers under the existing rules of permanent establishment. Businesses need to know where they stand in order to make investment decisions and calculate their tax liabilities. A particularly important policy objective is that the outcome is a practical one.